In this issue of the DCBA Brief, David Fish and Charles Corrigan have written an article describing the conflicting decisions of the Illinois Appellate Court regarding the enforceability of physician non-compete agreements and the case pending with the Illinois Supreme Court. As co-counsel for the employer in the Marwaha v. Woodridge Clinic, S.C., the author of this article explores additional aspects of the non-competition controversy.

The Fifth District decision in Carter-Shields1 relied heavily on the Dowd &. Dowd, Ltd. v. Gleason2 decision and on Section 9.2 of the Opinions of the Council on Ethical & Judicial Affairs of the American Medical Association (1986), which discourages the use of any restrictive covenants among physicians. However, AMA membership is not a prerequisite for obtaining a medical license, board certification or hospital staff privileges, and less than half of all physicians are members of the AMA. The first AMA proclamation declaring non-compete covenants unethical was adopted in 19333 and remained unchanged for nearly 30 years. However, in 1960, the AMA retreated from its position and issued a new opinion wherein there was no ethical proscription against a "reasonable agreement not to practice within a certain area for a certain time, if it is knowingly made and understood."4

An attempt was made in 1971 at a meeting of the AMA’s House of Delegates to declare all restrictive covenants unethical, but the resolution was defeated.5 A year later the Judicial Council of the AMA recommended banning restrictive covenants "except under the most unusual circumstances."6 Yet, once again the full body of the AMA rejected the outright ban and referred the matter for further study. Finally, in 1980, the AMA adopted an opinion that non-competition agreements are not "in the public interest" without declaring them unethical. Arguably, some believe the AMA’s reluctance to adopt an outright ban was due in part to the Federal Trade Commission’s final order in In re American Medical Ass’n,7 where the AMA was ordered to cease and desist from declaring certain contractual practices among physicians to be unethical even though non-competition agreements were not specifically mentioned.

Given the history and limited applicability of the AMA’s declaration, one can understand why the Fourth District in Prairie Eye Center, Ltd. v. Butler8 considered the AMA Section 9.2 rule merely advisory compared to Rule 5.6 of the Illinois Rules of Professional Conduct.

Rule 5.6 has also been the subject of a recent decision in Hoff v. Mayer, Brown & Platt,9 which may also provide some insight to the future of physician relationships should the Illinois Supreme Court declare physician non-compete agreements void as against public policy.

In Hoff, an attorney who had been with Mayer, Brown & Platt ("MBP") for 36 years resigned and became a founding partner of a new firm. He requested his retirement income from MBP which he alleged should have been in excess of $93,000 per year, plus additional cost-of-living adjustments, pursuant to MBP’s Restated Partnership Agreement, Retirement, Disability & Death Benefit Program ("Plan"). The former partner was denied his retirement income and he claimed the denial was in violation of Rule 5.6, as the Plan was basically a restrictive covenant. MBP contended that his resignation was not a "retirement" as defined by the Plan, because he continued to practice law after he left and therefore his retirement income was forfeited. The circuit court granted MBP’s motion to dismiss for failure to state a cause of action and the First District affirmed, holding (1) that the Plan was a bona fide retirement plan that could deny benefits to a retiring member who continued to practice law, and (2) that the provision denying benefits was not overbroad, even though it was unlimited in time, place, and scope of practice.

The First District in Hoff relied heavily upon its literal reading of Rule 5.6 which provides: "A lawyer shall not participate in offering or making: (a) a partnership or employment agreement that restricts the rights of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement . . ." (emphasis added). The First District determined that the exception applied and MBP had the right to deny the retirement benefits, even though the court acknowledged the public policy considerations as well as the Illinois Supreme Court’s comment in Dowd & Dowd, Ltd. v. Gleason that "the rule [5.6] is designed both to afford clients greater freedom in choosing counsel and to protect lawyers from onerous conditions that would unduly limit their mobility."10 Apparently, the forfeiture of more than $93,000 per year should the departing attorney practice law anywhere following his resignation was not deemed an onerous condition that would unduly restrict his mobility.

Economic Damages

Often, employers institute actions to enforce restrictive covenants not to stop those departing but as leverage to extract monetary damages or at least as an effort to impose a monetary cost. Such actions may then deter others, as may well happen from now on at MBP and other law firms with similar plans.

In the physician context, should non-compete agreements be declared void, perhaps the new approach will be modeled after the MBP plan and include forfeiture of benefits. Alternatively, physicians may consider the approach of attorneys who agree that should an attorney leave and a client follow, the attorney must split fees with his former firm for a specified period of time, even as to new matters. Although such a referral fee arrangement among lawyers requires certain disclosures and possibly certain restrictions to be in accord with Rules 1.5 and 1.16(a)(4) and (d),11 there is no case law yet which declares such arrangements void as against public policy or tantamount to an onerous condition that would restrict an attorney’s mobility.

The apparent end run around the public policy concerns voiding outright restrictive covenants may be the effective use of "economic damage" clauses. Although the remedy of injunctive relief requires proof of irreparable harm and no adequate remedy at law (i.e. damages), physician employers, like attorneys, may decide that economic damages can be estimated and obtained upon separation either via forfeiture of benefits earned, reimbursement of employer investments in employee training or referral fee arrangements involving post-separation revenue.

No physician or attorney will have difficulty in understanding the impact of "economic damages" in place of injunctive relief, even if such clauses are somehow inserted to promote professional mobility to better serve the public interest. Accordingly, the new arena for debate may well be the amount of economic damages even if the two parties agree to a specified amount in advance.

In general, a contracting party is only entitled to recover economic damages under a contract theory to the extent provided by the terms of the written instrument. However, if the purpose of the clause fixing damages is merely to secure performance of the agreement, it will not be upheld.12 Moreover, an agreement setting damages in advance of a breach is an unenforceable penalty unless (1) the amount so fixed is a reasonable forecast of just compensation of the harm that is caused by the breach and (2) the harm caused is difficult or impossible to estimate.13

Contract remedies are required to be compensatory, not punitive. Moreover, regardless of whether or not the amount is labeled "damages" or "penalty" for alternative performances or failure to perform, courts will look to the substance of the agreement. Punishment of a party for having chosen a particular alternative performance is a penalty and unenforceable as against public policy.14

Physician non-competition agreements may be declared void as against public policy. Physicians (and hospitals who employ thousands of physicians in Illinois) may respond by using agreements imposing significant economic damages for resignation, disguising such damages not as a disincentive to professional mobility but for some other rationale (e.g. retirement benefit planning).

Conclusion

If successful in avoiding the classification of a penalty, economic damage provisions may be more effective and a greater deterrent than existing non-competition agreements. As for the underlying public policy intended to promote freedom of choice and professional mobility as being beneficial to patients, these desired attributes may well become the real victim of a system designed solely on economic considerations. Perhaps non-compete provisions that are reasonable in scope, activity, and time, and balance employer and employee interests are not, after all, quite so onerous and contrary to the public interest as the Fifth District determined.

Frederick E. Roth of the Roth Law Firm, located in Naperville, Illinois, received his J.D. from The John Marshall Law School and his B.S. in Accounting from the University of Illinois. His law practice concentrates in closely-held business litigation/transactions and estate/trust matters.